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Budget: Fading significance or healthy evolution

Budget is a key annual event in the national calendar. From pre-independence era, this annual event has not only been responsible for creating a blueprint for resource allocation for a year, but has also been an important instrument of nation building. From legislations on taxation measures to new policy pronouncements, budget usually covers every aspect of national importance. However, with the advent of globalisation, the interaction of Indian economy with global markets has grown manifold. This in turn has made economic policy interventions more frequent and dynamic to take care of the ever changing financial landscape. As one time pronouncements in the annual budget becomes less relevant as the year progresses, the government has to manoeuver in several ways in order to manage the emerging event. Against this backdrop, the glory of the budget is slowly fading with falling expectations of the public at large.

“While the general budget is the key to provide a direction to the overall economy, we should also evaluate how much of the budgeted targets are dependent on external factors like crude oil prices or exports. In that sense, we have a whole process of budget making which comes up with scores of budgetary targets, achievement of which is dependent on factors which are not under our control,” D Ravishankar, Founder Director of Brickwork Ratings India, said.

He, however, noted that fiscal discipline and overall direction of the economy were outlined in the general budget and there would be no substitute for budgetary process.

Blurry objectives:

One of the key functions of the budget is to control prices. The role of controlling inflation in any economy can’t be overstated. However, with advent of globalisation, complexities in an economy have risen. This has resulted in less control of the budget on price rise. Though broad contours of price control is defined in the budget through controlling demand-supply function of various goods, most of the fine prints of controlling prices now require a dynamic approach. These decisions can’t be one time, static decisions and has to be taken on frequent basis with evolving situations. Also, price control lever has also been transferred to RBI to a great extent through its monetary policy pronouncements. Moreover, budget is no longer the only event for pronouncement of fiscal policies as seen in the market borrowing plans of the government.

Usually, gross and net borrowing numbers of the government for the next financial year are fixed in the general budget but alterations in these numbers are now a frequent phenomenon as the government tweaks them in order to attain the estimated growth and other macroeconomic figures such as inflation, fiscal deficit, current account deficit among others. Similarly, the government also postpones the budgeted numbers with respect to fiscal consolidation and adjusts fiscal policies accordingly to suit the changed environment.

Take for example the case of annual borrowing plan of the government. The central government has budgeted to have net borrowings of Rs 4.23 lakh crore and gross borrowings of Rs 5.80 lakh crore in 2017-18, which was announced in last year’s budget. However, fall in dividends from the Reserve Bank of India and dip in GST collections have raised concerns over breaching the target. In order to bridge the revenue gap, the finance ministry announced in December last year that it would borrow an additional Rs 50,000 crore in the current financial year through dated securities over and above the budgeted amount. However, it altered the initial plan of borrowing of additional amount a month later and said it would only raise Rs 20,000 crore from the market. While these kinds of changes ensure that the Indian economy maintains its high growth path, it also gives a message that budgetary document no longer remains sacrosanct and is open to meddling as and when required.

Taxing time:

Tax legislation is the focal point of any budget. As per article 265 of the Indian constitution, no tax shall be levied or collected except by the authority of law. This makes tax laws the exclusive domain of legislatures. Interestingly, while key legislations relating to taxation are approved by the legislature, the fine print of the tax laws has now become an executive domain. So, the government keeps on changing the fine prints of particular tax legislation throughout the year. This was unheard of in the pre-liberalisation era.

A case in point is the recently introduced Goods and Services Tax (GST). While announcement of its implementation was done in 2017-18 budget, realignment of taxation structure has been done throughout the year. After implementation of GST in July 2017; changes on tax slabs have been done a minimum of 3-4 times so far. And there is no indication yet that rates have stabilised. The GST council is examining the concerns of various stakeholders and is open to realign tax slabs in the near future.

Apart from realignment of taxation structure under GST, black swan events like demonetisation shows that the government can take crucial financial decisions with far reaching implications anytime of the year. This somehow dilutes the relevance of budget in the country.

Similar is the case for newly introduced Insolvency and Bankruptcy Code. Though 2016-17 budget provided the direction for introduction of the bankruptcy law, fine prints of the law and subsequent amendment were done outside the budgetary announcements. The central government even proclaimed an ordinance to give effect to certain amendments in the bankruptcy act.

Declining dependence:

Importance of budget for some sectors has also been reduced significantly in the last two decades. This is mainly true for export-oriented sectors like Information Technology (IT). The IT industry has prospered in India in an environment that is independent of government intervention and where the government had very little role to play. Naturally, the importance of budget for the industry has been declining with years. Rather, any event occurring in key exports markets such as US or Eurozone plays an important role on the performance of these companies. For example- recent corporate tax cut announcement by US has bigger impact on Indian IT company’s balance sheets than the Indian budget. Similar is the case for many other exports incentive sectors.

Resource allocation

Resource management is another critical area of focus for the budget. Though major announcements with respect to resource allocation are done in the budget, it has been increasingly seen that tweaking in resource allocation is done throughout the year. This has been increasingly seen as a dilution of importance of budget.

Similar is the case for big ticket investment proposals. Usually, huge investment plans with sector specific direction emanates from the general budget. However, this has also seen deviations in recent years. Even announcements on social schemes are now commensurating with birth anniversaries of different national leaders.

External factors:

With liberalisation of global economy, trade flows are now highly integrated throughout the world. This has led to a situation where a global event happening in some corner of the world is influencing the economies of other nations. For example- crude oil price rise has an adverse impact on oil importing nations, pushing up their import bills. At the same time, it is beneficial to exporting nations. So, if India has a budgeted fiscal deficit target assuming oil prices at a specific level, any upward movement will destabilise this pre-fixed fiscal math. There can be number of examples in which it can be extrapolated that a nation’s fiscal math is now more dependent on external factors beyond a country’s control and India is part of this bigger trend.

Despite these limiting factors, annual budget will remain at the core of India’s financial planning and overall resource allocation process. The budget is not only a financial statement depicting revenue and expenditure, but it is a process which is integral to Indian democratic structure. Through this process, legislature draws the credence of law making as enshrined in our constitution. However, like any other process or institution, budget has also undergone a process of transformation with time. And for a democracy like India, this should be construed as healthy.

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